Trade Liberalization of CSG and Other Specialized Products: Comparative Analysis Using SMART

Simulations Done Using Smart Analysis (Within Wits) For Working Out The Liberalization Impact Of CSG Trade Of Ecuador With Mercosur And China, Japan, Us And Eu In 2010

The study uses SMART- Single Market Partial Equilibrium Simulation Tool (available within WITS Database) to understand the liberalization effects of tariffs (zero tariffs) on the importer.

Rationale for Market Access Analysis

Despite successive rounds of multilateral, regional and unilateral trade liberalization, some trade barriers (including tariffs) remain highly restrictive in many (both developed and developing) countries.

For any government, it is crucial to be able to assess or to pre-empt the impact of different trade policy options. Market access analysis is a useful tool that can be used to anticipate the likely economic effects of various policy alternatives.

Impact of domestic trade reforms. For political economy or social purposes, it is often important to determine the distribution of the potential gains and losses from any contemplated policy changes. This will assist in anticipating any adjustment costs associated with reform implementation.

Impact of foreign trade liberalization. For instance, when preparing for trade negotiations, market access analysis helps identify the sensitive sectors where negotiating efforts should be focused. Also, it could be useful in the formation of negotiating coalitions in multilateral/regional negotiations.

The market access analysis tool included in the WITS package allows the researcher to investigate the impact of unilateral/ preferential/multilateral trade reforms at home or abroad on various variables including: Trade flows (import, exports, trade creation and trade diversion), world prices, tariff revenue and economic welfare.

The total trade effects are worked out by adding up the price effects (terms of trade effect) and quantity effects of trade by adding the trade creation and trade diversion effects. In addition the total welfare effect, consumer surplus effect and revenue effects of tariff reduction is also worked out.

For understanding the impact of tariff cuts, we discuss the opposite scenario of the impact on the economy if tariffs are imposed by the 'Small Country' and another by one 'Large Country'.

The tariff increases the price from P W to P W + t in the figure below. As a result, consumer surplus falls by (a + b + c + d). Producer surplus rises by area a, and government revenue increases by the area c. Therefore, the net loss in welfare, the deadweight loss to Home, is (b + d), which is measured by the two triangles b and d in figure below.

Overall Effect of the Tariff on Welfare

The overall impact of the tariff in the small country can be summarized as follows: Fall in consumer surplus -(a+b+c+d)

Rise in producer surplus +a

Rise in government revenue +c

Net effect on Home welfare -(b+d)

Therefore, any reductions in tariffs for small country will reduce production and consumption distortions. It would mean that consumer surplus will increase, producer surplus will decrease and welfare will improve of the small economy.

Large Country Case (see figure below): The Country is large enough to have impact on prices (terms of trade). The terms of trade improves for the tariff imposing country. The net effect on the welfare of the importing country is ambiguous.

Loss in consumer surplus-(A+B+C+D)

Gain in Producer Surplus +A

Government Revenue + C+E

Net Effect of Tariff = E-(B+D)

E is the terms of trade gain and B+D are the distortions in the economy. Hence, there are optimal tariffs which maximizes welfare (E-(B+D). The formula for the optimal tariff works out is the reciprocal of the elasticity of the foreign supply curve (upward sloping for large importing country). Reduction in tariffs for large country will effect terms of trade and reduction in distortions due to increase in consumer surplus and reduction in producer surplus and reduction in tariff revenue for the Government.

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